Income Taxes

12 Months Ended

Dec. 31, 2013

Income Taxes [Abstract]

INCOME TAXES:

(8) INCOME TAXES:

Differences between accounting rules and tax laws cause differences between the basis of certain assets and liabilities for financial reporting purposes and tax purposes. The tax effect of these differences, to the extent they are temporary, is recorded as deferred tax assets and liabilities. Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in deferred assets and liabilities. Temporary differences which give rise to deferred tax assets and liabilities consist of net operating loss carryforwards, stock compensation expense not deducted for tax purposes until trading restrictions are removed and declared as compensation by the recipient, and accelerated depreciation methods for income tax purposes.

If all of our net operating loss carryforwards and temporary deductible differences were used, we would realize a net deferred tax asset of approximately $141,000 based upon expected income tax rates. Under ASC 740, deferred tax assets must be reduced by a valuation allowance if it is likely that all or a portion of it will not be realized.  We have determined it is more likely than not that we will realize our temporary deductible differences and at least some of our net operating loss carryforwards prior to their expiration, and we have recorded a deferred tax asset for the amount expected to be realized.  We have provided a valuation allowance on the portion of the estimated deferred tax asset not expected to be fully realized before it expires.  Although we have incurred financial reporting net losses for six of the prior nine years, we have also recognized taxable income for five of the prior nine years utilizing a total of $485,000 of our net operating losses.  We believe we will continue to realize taxable income in greater amounts in future periods sufficient to utilize a portion of our tax loss carryforwards before they expire.  At December 31, 2013, we would need to generate approximately $480,000 of taxable income to fully utilize our $120,000 net deferred tax asset.

Positive evidence we evaluated in the order of significance and weighting in our evaluation includes the amount of net operating loss carryforward utilized against current income tax liabilities in four of the prior eight years, the trend of increased revenues from 2006 through 2013 that is expected to continue at existing or improved margins, and the length of time the net operating loss carryforwards are available before they expire.  Negative evidence we considered in the order of significance and weighting in our evaluation include the timing of expiration of the net operating loss carryforwards prior to being utilized, increased depreciation from our pulse dryer, unpredictability of future sales and profitability, the unknown future operating results from our pulse drying facility, competition from others, and new government regulations.  We determined greatest weight should be given to our prior use of net operating losses in recent years and our expected future sales and taxable income from operations in our evaluation.  We expect our future sales and taxable income to continue at current levels as a minimum and to increase in future years.  Our sales growth is due to increased interest and sales of our product THPB since 2011, which is expected to continue into 2014 and future years.  We also expect our new pulse dryer and ultra pure filtration system, and the interest in THPB, to increase the interest and sales of our other products.

We calculated our deferred tax asset using the temporary deductible timing differences plus the net operating loss carryforward multiplied by our expected effective income tax rate.  Our taxable operating income is expected to be of the same character as our temporary deductible timing differences and net operating loss carryforwards.  We estimated our future taxable income based on historical results and expected future trends in sales and margins.  We estimated the timing of deducting our temporary deductible differences.  We estimated the amount of our net operating loss carryforward we would be able to utilize prior to expiration.  The difference between our gross deferred tax asset and the amount expected to be utilized was recorded as a valuation allowance.  We remeasure our valuation allowance each quarter based on changes in our current and expected future sales and margins, and changes in the other factors of both positive and negative evidence.

We have available at December 31, 2013, unused net operating loss carryforwards totaling approximately $882,000 that may be applied against future taxable income. If not used, the net operating loss carryforwards will expire as follows:

Year Ending December 31,	Amount
2017	$	177,000
2020		280,000
2021		71,000
2024		66,000
2028		7,000
2030		160,000
2031		73,000
2032		48,000
Total	$	882,000

For 2013, we recognized a $80,000 provision for income taxes.  Our valuation allowance percentage is 15% at December 31, 2013. 

For 2012, we recognized a $25,000 provision for income taxes and we decreased our deferred tax valuation allowance based on our overall evaluation of our future profitability and ability to utilize our net deferred tax assets.  Our valuation allowance percentage is 10% at December 31, 2012. 

Because of the inherent uncertainties in estimating the valuation allowance on the deferred tax asset, it is at least reasonably possible that our estimated deferred tax asset will change in the near term and be material to the financial statements.

The components of our provision for income taxes are as follows for the years ended December 31:

	2013			2012
Current income tax benefit (expense)	$	-		$	-
Tax benefit (expense) of temporary differences		(80,000	)		(101,000	)
Decrease (increase) in valuation allowance		-			76,000
Total net tax benefit (expense)	$	(80,000	)	$	(25,000	)

Significant components of our deferred Federal income taxes were as follows:

	2013			2012
Deferred tax assets:
Net operating loss carryforwards	$	247,000		$	268,000
Less valuation allowance		(21,000	)		(21,000	)
Deferred tax assets, net of valuation		226,000			247,000
Deferred tax liabilities:
Depreciation expense		(79,000	)		(47,000	)
Impairment allowance – assets held for sale		(27,000	)			-
Deferred tax liabilities		(106,000	)		(47,000	)
Net tax assets	$	120,000		$	200,000

The differences between the effective income tax rate reflected in the benefit (provision) for income taxes and the amounts, which would be determined by applying statutory income tax rate of 28% is summarized as follows:

	2013			2012
Tax benefit (expense) at Federal statutory rate	$	(80,000	)	$	(28,000	)
Effect of State taxes		(11,000	)		(5,000	)
Effect of surtax exemption		6,000			8,000
Other		5,000			-
Total tax benefit (provision)	$	(80,000	)	$	(25,000	)

We file income tax returns in the U.S. Federal jurisdiction, and in various state jurisdictions. We are no longer subject to U.S. Federal or state income tax examinations by tax authorities for years before 2010, except for net operating loss carryforwards from periods prior to 2009.

We have reviewed and evaluated the relevant technical merits of each of our tax positions in accordance with accounting principles generally accepted in the United States of America for accounting for uncertainty in income taxes, and determined that there are no uncertain tax positions that would have a material impact on the financial statements of the Company.